Reviewed for EH.Net by Anne L. Murphy, Department of History, University of Hertfordshire.

This book emerges from the “Tipping Points” project located at the Institute for Hazard, Risk and Resilience at Durham University. It is a fine work of synthesis and a focused reassessment of the nature of British banking in the long run. It is a “must read” for historians, economists and policy makers.

British Banking presents a strictly chronological account of banking development, starting with the establishment of the Bank of England (BoE) in 1694 and bringing us up to the present day. Michie opens with the thorny problem of how to define a bank so as to capture continuity and change over time. The definition he offers is “all financial institutions whose main business involved borrowing short and lending long, as that exposed them to issues of liquidity” (p. 3). In adopting this definition, he follows that employed in 1997 by Eddie George, then governor of the Bank of England, who went on to assert that it was the mismatch between the way banking assets and liabilities are configured which makes banks “peculiarly vulnerable to systemic risk” (p. 2). As Michie asserts, George’s analysis warranted far greater attention than it received at the time. The crises that were to follow in 2007/8 proved just how right he was to be concerned about the problems of liquidity.

While British Banking is an account of banking development in the long run, the underlying focus throughout is the crisis of 2007/8 and the question of whether the history of British banking offers us any insight into its causes and ways to prevent future crises. The first chapter offers a broad chronological sweep of the period from 1694 to 2015. This is no easy task as it is difficult to find data on the number of banks in operation during the eighteenth and nineteenth centuries. Michie has gone some way towards remedying this gap and presents useful statistics in a set of appendices. These show that the peak in the number of banks came around 1810. There were more than 1100 banks in operation in Britain at that time. The number has been in decline ever since. There were fewer than 100 in 2008. The banks of the eighteenth century were generally small and were the product not of lack of regulation, as is often asserted, but rather a liberal lending policy by the BoE. Once the BoE changed policy, a tipping point in Michie’s account, the numbers of banks contracted.

Chapters three and four both focus on the period from 1825 to 1914 which saw increasing consolidation and the professionalization of the banking industry. Banks focused their efforts on developing what Michie refers to as the “Lend and Hold” model of banking in which they retained a close relationship with their customer base and, in general, the deposits of one group of its customers went to fund the borrowings of another. Scale won the day but, importantly, the sector remained diversified and effective competition was retained. By the eve of the First World War, British banking had achieved both significant stability and the trust of the British populace.

Chapters five and six cover the periods from 1914 to 1945 and 1945 to 1970, respectively. Here the story is one of solid and cautious respectability. The system became more concentrated and more conservative. Michie denies that the effect of this was a lack of effective financial support for industry. His view is that the problems that beset British industry lay elsewhere. Yet the conservative nature of British banking post-war meant that banks failed to participate in the growth of financial services and, although London remained the hub of the global financial system, it was not domestic banks that benefited from this advantage. The cost of banking stability was stagnation in the financial sector.

Chapter seven covers the period from 1970 to 1997 and, in contrast to the rest of the book, it feels underdeveloped. This period was one of tremendous and highly significant change including the oil shocks of the early 1970s, ‘Big Bang’, and the explosive expansion of the derivatives market. None of these receive a great deal of attention and perhaps an opportunity was lost to address some of the key ‘tipping points’ that led to the crises of the twenty-first century.

Chapters eight and nine take us from 1997 to 2015 encompassing the crisis, its causes and its consequences and resolutions. Michie identifies the instabilities that had been introduced into the British banking system and which led to the 2007/8 crises as having been, at the regulatory level, caused by the erosion of the BoE’s regulatory role as a result of the policies of New Labour from 1997. Instability at market level was a consequence of the erosion of the BoE’s position as lender of last resort but also the switch to the U.S. dollar as the basis for inter-bank lending made it more difficult for the BoE to support the money market. Lastly, the system had become unstable at the level of individual institutions as intensified competition, from the 1970s onwards, had led to risk-seeking and profit-maximizing strategies which were unsustainable in the long run.

Michie, like any good historian, cautions against the idea that we can draw straight-forward lessons from history but he does nonetheless offer his view on what taking a long-run perspective might offer for policy makers. Stability, he argues, lies not in legislation but rather in “the existence of a small number of large banks with a diversified business model and strictly enforced code of behavior” (p. 268).

Anne L. Murphy is Reader in History and Associate Dean Research for the School of Humanities at University of Hertfordshire. Her most recent publication is “Clock-watching: Work and Working time at the Late-eighteenth-century Bank of England,” Past and Present, 236 (2017): 99-132.

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